Last week the Nobel committee announced that this year’s prize in economics would be going to Dr. Edmund Phelps of Columbia. This is good news indeed for advocates of supply-side economics. Phelp’s principal academic achievement is his successful rebuttal of one of the central tenets of modern Keynesianism: the Phillips curve. Someone should alert the board of governors at the Federal Reserve of Phelps vindication, since the minutes released from the Fed’s most recent meeting still contain the same old Keynesian gobbledygook … Phelps has disproved the Phillips curve, at least as a long-run economic planning tool. He argues persuasively that labor markets determine the unemployment rate over the long run
Dr. Thoma replies:
it’s been quite a long-time since anyone seriously suggested a permanent tradeoff between inflation and unemployment, particularly since Phelps, Friedman, Lucas and others came up with came up with the expectations augmented short-run Phillips curve to rebut this idea. Thus, the commentary below strikes at a position – a permanent tradeoff between inflation and output – that no economist that I know of holds. It is the nature of the short-run Phillip’s curve that is at issue, how long the short-run tradeoff persists, the steepness of the tradeoff, whether hybrid versions of the Phillips curve are needed, etc., and contrary to what is stated in this commentary, the existence of a short-run Phillip’s curve is well-accepted. I do agree with the commentary’s suggestion that somebody doesn’t understand this literature, but I doubt very much that it is Bernanke, Mishkin, and others at the Fed that are the ones missing key pieces of this line of research … Saying that economists believe “growth causes inflation” mischaracterizes the issue. Nobody believes that growth is inflationary. Increases in productivity (i.e. growth in aggregate supply) puts downward pressure on prices. It is growth in demand relative to growth in supply that matters, and if demand growth outstrips supply growth, inflation will result.
Actually, the problem with Bowyer’s idiocy can be seen if one compares his graph to that provided by KNZN a couple of months ago:
For practical purposes, the Phillips curve – the version that is used to guide forecasts and generate policy prescriptions today – is not a relationship between unemployment and the level of inflation; it is a relationship between unemployment and the change in the inflation rate.
So Bowyer is looking at the first derivative of prices with respect to time when he should be looking at the second derivative. Then again – I suspect Jerry Bowyer has no clue what a second derivative is. He certainly has no clue as to what Dr. Phelps and other economist have been discussing for the past forty years.